Delta And United Could Boost Outlooks Tuesday, Analysts Say, As Airline Shares Lag

A United Airlines plane is towed at George Bush Intercontinental Airport in Houston in August 2017.(AP Photo/David J. Phillip)

Airline shares have been out of the limelight and out of the money since January’s earnings calls. The former, at least, will change this week with the industry’s first major 2918 investor conference set for Tuesday.

During a two-hour period that begins at 8:45 a.m. EDT Tuesday, top executives from American, Delta and United will all present at the J.P. Morgan aviation, transportation and industrials conference in New York.

“We expect several airlines to utilize next week’s JPM ATI conference as a platform for raising first quarter guidance,” JP Morgan analyst Jamie Baker wrote in a report issued Friday.

Baker said he expects “modest-to-significant improvement in consensus expectations in the near term, particularly at UAL. Combined with easing capacity concerns, we strongly suggest that trade-oriented accounts increase their exposure to airline equities ahead of next Tuesday’s disclosures.”

Baker raised estimates for all seven major airlines. Most of the increases were modest, but he raised his current quarter United estimate to 32 cents from three cents: consensus is five cents.

He said March demand trends “are emerging at or above the high end of management expectations,” while fuel prices have been lower than managements anticipated in January. That combination should lead managements to endorse high-end revenue per available seat mile guidance, he said.

Cowen & Co. analyst Helane Becker also expects improved guidance.

"We expect the airlines to update 1Q18 investor guidance, and suspect the updates will be positive given relatively modest industry capacity growth in 1Q18, declining jet fuel costs, and continued global economic improvement," Becker wrote Monday.

"Last week's discussion was about United potentially lowering 2018 capacity growth guidance due to our estimate of a potential lack of regional lift," she wrote. "If there is even a hint about United reducing their 2018 capacity growth, it would be a key positive driver for the stocks."

Year-to-date, only two of the top eight airlines have outperformed the S&P 500 Index and only three are in positive territory.

As of Friday’s, close, American shares were up 8%, United shares were up 6%, the S&P Index was up 4%, and Delta was up 0.16%. JetBlue was down 2%, Spirit was down 4%, Hawaiian and Southwest were down 9% and Alaska was down 12%.

Investors have capacity concerns: many were spooked when United CEO Scott Kirby said on the Jan. 23 earnings call that the carrier will grow capacity 4% to 6% in each of the next three years. That triggered a sell-off that reduced United’s share price by 16% over the next three days and wiped out $14 billion in airline industry shares.

United shares opened Jan. 2 at $67.90. They reached their 2018 high of $79 on Jan. 16 and their 2018 low of $61.96 on Feb. 6. Shares closed Friday at $71.55.

Besides the backdrop of higher demand and weaker fuel, Stifel analyst Joseph DeNardi sees gains for American due to its credit card affiliations..

In a March 6 report, DeNardi said that by 2020, American will earn $3 billion annually “just from selling miles.”

American CEO Doug Parker has said repeatedly that going forward, American’s pre-tax net income will between $3 billion and $7 billion annually. “Clearly, equity markets aren’t valuing American’s stock as if these targets can be achieved – not even close,” DeNardi wrote.

Each credit card company pays the airline “for the standalone value of the mile (based on the fact that it can be redeemed for travel) and also pays the airline a marketing fee to use the airline logo and to access its loyalty program member list,” DeNardi said.

“For American Airlines, that marketing fee equaled $2.4B in 2017 and is expected to increase to $3.0B by 2020 based on American's contract with Citi and Barclays.

“What American - and other airlines - continue to struggle with is explaining to investors why the financial performance delivered over the past few years is sustainable going forward,” he said. “The reason they struggle is that airline management teams pinkie-promised their credit card partners to never discuss the economics of their partnerships.”

I began covering airlines during the Eastern strike. I worked for Miami Herald, Charlotte Observer, Sacramento Bee, Fresno Bee, Toledo Blade and Aberdeen (Washington) Daily World. I also worked for U.S. Airways, writing internal publications and speeches for the company's ex...